How has China’s economy changed over the years and what are some of the threats to its growth today? Listen as Nicholas Hope discusses these key issues and some of the common problems that both the US and China are Facing today.

Transcript

Segment 1:

Alan: Welcome back. I’m here today with Nicholas Hope. He is the director for the Stanford Center for Economic Development also known as SCID. Welcome to today’s show.

Nicholas: Thanks a lot Alan, pleasure to be here.

Alan: You came to Stanford University and you’ve run this organization for a period of years. Let’s step back a few a few years. What brought you to Stanford and what was your background prior to coming here?

Nicholas: I started as an academic. I spent a lot of time at universities and finished a PhD in economics in the mid-70s, teaching in Australia at the time and working in the World Bank. I spent 24 years in the World Bank, initially as an economist doing mainly work on international finance and lending money. Part of the latter period, I was country director for China and I lent about $10 billion to China in 3 1/2 years. I wouldn’t say I fell in love with the place exactly but I was intrigued by the complexity of what they were trying to do. The projects that we did there were extraordinary, they were very impressive projects. And so when the bank reorganized and decided to move me around, I felt I still had more to learn about China and even more to give to China. Stanford offered me the possibility of coming and joining this new center, initially as deputy director and running a China research program. So I came and tried it out for a year and a half and Stanford offered me the job and I retired from the bank in 2000. I’ve been at Stanford ever since.

Alan: So 14 years at Stanford?

Nicholas: Yes, that’s correct.

Alan: What’s the mission for the Stanford Center for Economic Development?

Nicholas: Well, the original director was a professor Anne Krueger who went on to be the first Deputy managing Director of the International Monetary Fund as part of her illustrious career. Her concern when she set up the center was to renew the high level scholarship in the United States on the major developing countries because the feeling was that for various reasons, interest in these emerging markets had flagged in academic circles in the US. She proposed to establish a center that would refocus economic policy research in China and India- the two most populous countries and then initially one of the big economies in Latin America. Eventually she said let’s do Latin America with a focus on Argentina, Brazil, Chile, Mexico but her two biggest focuses have been on what sorts of policy changes would help performance in China and India.

Alan: What are some of the similarities between the Chinese economy and the US?

Nicholas: It’s an interesting question. It’s easy to see the things that are different from the things that are similar.

Alan: Let’s start with the differences.

Nicholas: Let’s start with the similarities because to me the biggest similarity is the size. The US is the world's biggest economy, the Chinese is the second-biggest economy. To me, that would have been inconceivable statement 20 years ago, there would be no way I would say it would be as big as it is now. China now is the biggest trading economy if we simply look at merchandise trade, and it’s surpassed United States as the second-biggest. That too would have been an inconceivable statement. So, the similarity is that in each of these countries, what they do has material impact on the rest the world. I think sometimes American policymakers forget that fact, that what’s done here causes tremendous repercussions throughout the global economy and actually complicates matters for many other policymakers in other countries. I think the Chinese started their reform process and Deng Xiaoping very clearly said let’s keep our head down and get rich, let’s not disturb people and let’s not make waves. But that’s not possible anymore, because China is so big that if it does things domestically that impact the international economy, then there are vibrations and consequences. Differences? China’s still very much dependent on manufacturing. The US has got a huge manufacturing sector but as a share of employment in the US economy, services have moved ahead. Indeed, the Chinese are seeing the service sectors develop quite rapidly. But they still have a large manufacturing base and one would argue that the initial cause of their growing prosperity was this transition to low-wage, blue collar manufacturing, largely done for foreign market.

Alan: I’m visiting here today with Nicholas Hope. He is the director of the Stanford Center for economic development. Nick, we need to take a quick break and we’ll be back after these messages and will talk more about China.

Segment 2:

Alan: Welcome back. I’m here today with Nicholas Hope. He is the director of the Stanford Center for economic development. Nick, we’ve been talking about China. How friendly is China to entrepreneurship?

Nicholas: That's a really good question Alan.I think they talk a good game and so in principle, they’re extremely friendly. In practice, perhaps a little less so. They depend heavily and perhaps too much so, and it's become a somewhat concerning trend since the international financial crisis on the state enterprise system. They see the status of state enterprise systems as a sort of underpinning of growth and they’ve forgotten a little bit I think, the 80s and 90s, when it was the emergence of dynamic, atleast quasi private enterprise that was driving the growth miracle observed in China. But they do talk a lot about innovation and entrepreneurship, in fact every second word now seems to be ‘innovation’ when you're in China and we are actually are doing a project currently with the policy research office of the State Council- a couple of the Stanford academics, one from Berkeley and me and then a group from China as well and it's comparing the way in which the US approaches entrepreneurship with what we see in China.

Alan: We still maintain about half the venture capital money in the world right here in the Silicon Valley. How does Silicon Valley interact with all their innovation entrepreneurship to China and how do the VCs do?

Nicholas: It's a very interesting question. Now I think it's much more positive than when I first came to Stanford. At the time, I think a lot of VCs had a very dodgy nature of the Chinese legal system. If you're in, and something goes wrong is there any real prospect that the courts will support your claim or essentially secure your property rights for you, and the answer was clearly no. So for many of the investors, the overriding concern was exit. We put money into a promising firm and how do we get out? We were often approached to say to the government to let these companies go to IPOs immediately, so we can clear the money, get out and make the profit that we’ve earned, they don’t have to go through any complicated process. I actually felt that the government was right to be cautious. The Shanghai market in the early stages was very much a casino, in which the underlying information that was provided about the listed companies was not necessarily very credible. Now I think the things have changed. There are I think many ways now to get out, principally acquisition. The private equity groups and the venture capitalists seem much more comfortable with the environment as its evolved.

Alan: What are some of the international issues that need to be addressed with China?

Nicholas: There’re myriad. Security is one, environment and global warming would be another- two biggest generators of the greenhouse gases are China and the United States. Antiterrorism would be a third. China’s got a ton of problems with terrorism and they are somewhat at a loss to know how to manage the situation. My biggest concerns for the US and China is as we move ahead, how can we maintain healthy competition but at the same time ensure that policy coordination is done at the international level to the extent that the sorts of policies that both countries adopt are compatible with a healthy international economy. In the past, this was largely done through the G-7 mechanism and I’m a great fan of the G1. I think the US basically calls the shots and that largely worked well for everybody but I don’t think that's an option going forward. I think the Chinese would be very reluctant even in the group of G2 to accept that the US called the shots and China followed along. So, we need a mechanism for international governments or atleast for the control of the international economy, and I don't see that yet.

Alan: I’m visiting here today with Nicholas Hope. He is the director at Stanford Center for economic development. Nicholas, we need to take a quick break and we'll be right back after this messages on talking about the China economy and where it’s going from here. We’ll be right back after these messages.

Segment 3:

Alan: Welcome back. I’m here today with Nicholas Hope. He’s the director for the Stanford Center for Economic Development and that we’ve been talking about China. Back in 1975, China implemented a one child policy and that as we rolled up forward to today, how is China's population affected by this policy and place and what problems do you foresee in the near term.

Nicholas: The issue, this was one of a former PhD student who works for Goldman Sachs in Hong Kong, who wrote a paper that said China will be old before its rich. What is increasingly happening epically given, with a very low retirement age- 55 for women and 60 for men. It means that the Chinese are living a long time after they retire, so paying pensions has become a very costly business. With fewer Chinese entering the workforce, which is peaked at about a 750 million, it’s now declining as fewer children enter the workforce, it's better quality- many more educated people, much more university level education- but what one sees is increasingly the burden of often elderly people on fewer workers. Of course the elderly people look to see in improving lifestyle and don't expect to be miserably poor in old age, and particularly the really old people who sacrificed a lot in the during the early phases of the reform. So, there are ways to deal with pension issues but we know they are politically difficult because we see the problems the US has- the Social Security system and China's problems mirror the US problems almost exactly.

Alan: How big can China's economy get? Are we just starting?

Nicholas: We are not just starting. The growth is slowing, there are some real issues currently regarding how to maintain the growth, the president has sort of staked his reputation on the 7.5% a year. But the economy is now so big that it's got to slow. Nothing grows 10% forever and the economy is US$ 9 trillion. But if one looks at the per capita income, $6000, there is enormous scope for continued growth in the Chinese economy and much greater average wealth for the Chinese citizen of health. How far that can go with existing technologies would be the question one would ask? If you’re going to generate your electricity from burning coal or if you are going to have a very resource intensive construction sector- uses lots steel and cement- then the question would be at what point do you run into a fairly severe constraints on growth that simply stemmed from the types of technologies that you’re implementing. I’m quite optimistic that we can find solutions to that sort of constraints, that technological advances will make it possible for China, perhaps to grow not as fast as it did in the 90’s and 2000’s but continue to grow considerably faster than the developed countries for another generation.

Alan: What are some of the social issues that China needs to deal with?

Nicholas: To me, the two biggest social issues and there’s a question of economic reform and how they are going to push it forward and they’ve got blueprints but you have to see how they implement some of these changes. The problem that perhaps wasn't foreseen although Deng Xiaoping said that as a price for growth, we’ll get greater inequality in the Chinese economy although I don’t think he had in mind the inequality that now exists- the gap between the extraordinarily wealthy and then the still quite poor, better off but poor is last and that's a tremendous potential threat to social stability. A compelling argument exists for the Chinese government to help find ways to allow the people to have a voice in the governance. If the government is performing poorly and if I'm a resident of Shanghai and I’m comfortable, I’m a lawyer or a doctor, a businessman, I’ve got my kids in a school that I think is performing badly, public transport doesn't work well, the electricity supplies are less reliable, I don’t trust the water, sewage systems don’t work too well, there’s lots of pollution, who do I complaint to? In China, the people appointed are more accountable to the leadership in Beijing than to their own constituency.

Alan: I love these issues. We need to take a quick break and I would like to hold you for another segment. In this segment, I would like to get into the question of can the Chinese government be lobbied? We’re visiting today with Nicholas Hope, he’s the director for the Stanford Center for Economic Development. We’ll be right back after these messages.

Segment 4:

Alan: Welcome back and I’m visiting here today with Nicholas Hope. We've been talking about China. Nicholas currently serves as the director of the Stanford Center for Economic Development. We were talking about some of the social infrastructure challenges that China and how this brings us back to Silicon Valley's interaction with China. A lot of venture capitalists have been going there and putting money in but they show concerns about whether it is possible to lobby the Chinese government or try to help the government be a little bit more friendly towards the way US is doing business. I’d like to throw that out as a rhetorical question whether it is possible to lobby in China still?

Nicholas: Yes, I think it is. I think certainly at the level of the central government, there’s quite a receptive audience, they’re for it. The government of China from the get go, to some degree unlike Japan Korea before, but China has been very receptive of foreign investment, it has always wanted foreign investment. Much of the early foreign investment was overseas China- coming back to the ancestral villages in setting up a small manufacturing outfit, shipping all the stuff they produced abroad, but in Beijing I think, the government has been keen to say the least, bring in direct investment. Actually in recent years at the municipal and even provincial level, the hunger for foreign investments has been even more avid, just wanted foreign investment with the idea that it’ll create jobs, promote growth and generally help in the career. The problem of course for the foreign investor is the unreliability of the legal system, so the chances that your property rights will be respected in the event that you and your partners have a falling out, I think in the past it’s been comparatively low. The other issue of course is theft of intellectual property, it's a national sport in China and I don’t think that’s changed very much. But the big boys-the Hewlett-Packard's, the Cisco’s,Intel's- they have been able to marshal enough legal heft that in the event of something too egregious, that they are able to step in. I think the Chinese government has certainly made it clear that some behaviors of the entrepreneurs, partners of the big companies is not so good. My direction with the government officials, particularly over the period which ended the WTO, was that many of them thought this was a great opportunity not just to bring the Chinese central legislation up to national standards but to begin to crack the whip over the provinces on some of these issues. I think that in a period when the Chinese government was very sensitive to the idea that they were stealing international intellectual property, at the level of provinces, the sun was shining, you could get your hands on anything.

Alan: I love all this content but unfortunately Nicholas, we’re out of time today. Maybe what we can do is that if a person wants to find out more about the policy decisions at Stanford University, is there a website that they can go to?

Nicholas: scid.stanford.edu

Alan: We’re visiting here today with Nicholas Hope, he is the director for the Stanford Institute of Economic Development. Nicholas, thank you for being on today’s show.

Nicholas: My pleasure.

Alan: Join us next week right here on this station.

About Nicholas Hope:

Nicholas Hope is the Director of the Stanford Center for International Development (SCID). He also directs SCID's China research program. His current research is private enterprise development in China and progress of reforms in China, especially in the financial sector. His interests are in East Asian economies, especially China and Indonesia, and his teaching interests are in development of Asian economies, role and effectiveness of international financial institutions, and thesis supervision of students working in those areas.